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Lecture Economics (19/e) - Chapter 14: Rent, interest, and profit

After reading this chapter, you should be able to: Explain the nature of economic rent and how it is determined; describe the loanable funds theory of interest rates; demonstrate how interest rates relate to the time-value of money and vary based on risk, maturity, loan size, and taxability; relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses; list the share of U.S. earnings received by each of the factors of production. | Rent, Interest, and Profit McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Economic Rent Price paid for land and other natural resources Perfectly inelasticity supply Changes in demand A surplus payment LO1 14- Economic Rent Acres of Land Land Rent (Dollars) L0 D1 D2 D3 D4 S R1 R2 R3 0 a b LO1 14- Economic Rent Land ownership: fairness vs. allocative efficiency Application: a single tax on land Henry George’s proposal Single tax movement Criticisms LO1 14- Interest Price paid for use of money Stated as a percentage Money is not a resource Interest rates and interest income Range of interest rates Risk Maturity Loan size Taxability LO2 14- Loanable Funds Theory Extending the model Financial institutions Changes in supply Household thrift Changes in demand Rate of return on investment Other participants LO2 14- Loanable Funds Theory Quantity of Loanable Funds Interest Rate (Percent) 0 D S i = 8% F0 The equilibrium interest rate LO2 14- Time-Value of Money Money is more valuable the sooner it is obtained Ability to earn interest Compound interest Future value Present value LO3 14- Role of Interest Rates Relationship to: Total output Allocation of capital R&D spending Nominal and real rates Application: Usury laws Nonmarket rationing Gainers and losers Inefficiency LO3 14- Economic Profit Explicit costs Implicit costs Pure profit Total revenue less explicit and implicit costs Role of the entrepreneur Normal profit LO4 14- Economic Profit Insurable risks Uninsurable risks Changes in economic environment Structure of economy Government policy New products of production methods LO4 14- Economic Profit Profit is compensation for bearing uninsurable risks Sources of economic profit Create new products Reduce production costs Create and maintain a profitable monopoly LO4 14- Economic Profit Profit rations entrepreneurship Profit aids in resource allocation Profit and corporate . | Rent, Interest, and Profit McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Economic Rent Price paid for land and other natural resources Perfectly inelasticity supply Changes in demand A surplus payment LO1 14- Economic Rent Acres of Land Land Rent (Dollars) L0 D1 D2 D3 D4 S R1 R2 R3 0 a b LO1 14- Economic Rent Land ownership: fairness vs. allocative efficiency Application: a single tax on land Henry George’s proposal Single tax movement Criticisms LO1 14- Interest Price paid for use of money Stated as a percentage Money is not a resource Interest rates and interest income Range of interest rates Risk Maturity Loan size Taxability LO2 14- Loanable Funds Theory Extending the model Financial institutions Changes in supply Household thrift Changes in demand Rate of return on investment Other participants LO2 14- Loanable Funds Theory Quantity of Loanable Funds Interest Rate (Percent) 0 D S i = 8% F0 The equilibrium .